Wednesday, October 15, 2014

Fixing Global Tax Disorder: Multilateralism vs. U.S.-Led Effort

Tax Analysts has a write-up [gated] of the international panel from last week's conference on Reforming Entity Taxation, in Boston. Excerpts:

"What we have now is a mess," Robert Peroni, a professor at the University of Texas School of Law, said October 10, referring to the international tax system.

... A discussion of how to go about cleaning up that mess pitted multilateralism against a U.S.-first approach. Panelists appeared to share the realpolitik view that whatever course is followed, dominant actors have called the shots for decades and will probably continue to do so.

According to Allison Christians of McGill University Faculty of Law, the problems addressed by the conference's panel on international taxation are not much different from those faced by four academics more than 90 years ago when asked by the League of Nations to study the question of how to share the world's income tax base. Christians said the crucial issue now is the failure to tax income as opposed to double taxation, which worried policymakers then.

"If you gave international tax a grade over 90 years, it would be an F," Christians said.

"We will not take fairness seriously on the international stage."

Christians said that powerful countries too often end up calling the shots, much to the detriment of a fair and orderly international tax system. "When we turn to power, we sacrifice both efficiency and equity . . . and administrability as well," she said.

Christians was especially critical of the U.S. for using the Foreign Account Tax Compliance Act to expose underpayment of U.S. personal income taxes while cautioning that the OECD's base erosion and profit-shifting initiative could negatively affect U.S. multinationals.

"FATCA leverages U.S. control over the global financial system, thereby forcing the populations and governments of poorer countries to direct precious tax administration and regulatory compliance resources toward the enforcement of the U.S. tax system over their own," Christians said. "Yet the U.S. has not used this same leverage to respond to base erosion. U.S. lawmakers have not seen as great a good in stopping tax avoidance by U.S.-based corporations as they have in stopping tax evasion by U.S. individuals."

...While advocating multilateralism, Christians admitted that there is a significant risk in changing course that could prove detrimental to U.S. interests. She said that it might be in the best interest of the U.S. to act while it still has policy flexibility to shape a future international tax regime in which it might not play as dominant a role.
"Someday there might be a global power shift," Christians said. "We might wish we built a structure when we had a chance." [I believe i said an "appropriate" governance structure"]

Christians' co-panelists placed less emphasis on multilateralism. ... Peroni said that what the world needs now is a "real worldwide" income tax regime rather than a territorial system. "Territorial undermines fair allocation of burden, and should only be enacted if its efficiency and simplification benefits outweigh its costs in terms of fairness," he said.

Peroni said competitiveness should be defined not in terms of improving the after-tax profits of already successful U.S. multinationals, but in terms of citizens' living standards. He stressed the importance of fairness -- both actual and perceived -- in any reforms to the federal income tax and warned that simplification would probably be given short shrift.

"Significant simplification in the international corporate tax area may be difficult to achieve because the transactions involved are often inherently quite complex and, therefore, the tax rules dealing with such transactions are likely to have a certain degree of unavoidable complexity," Peroni said.

Peroni said that calls for formulary apportionment of international income could result in U.S. multinationals moving operations and jobs to low-tax foreign countries.

...Martin Sullivan of Tax Analysts said that U.S. moves to curb tax shelters by stressing economic substance can often have a similar effect. "It is so ingrained that deals without economic substance have to be bad," Sullivan said. Comparing the paper companies often set up in Bermuda with real operations established in low-tax Ireland, Sullivan wondered why Ireland is considered better from a U.S. point of view. "Would it be better if there were 40,000 factories in Bermuda?" he asked.

... The panelists weren't optimistic about the prospects for international tax reform. Peroni said "no sensible president" would push for reform during his or her first term. "If a president is not reelected, this could go on forever," he said. "You might be able to do a few antiabuse provisions . . . but that's a Band-Aid on the problem," Peroni said.
Christians emphasized the central role and responsibility of the U.S. should the world opt for a multilateral approach. "With great power comes great responsibility," she said.

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